Andrew Bary
When it comes to income, investors essentially have two choices: stocks or bonds.
Barron's has favored stocks for the past decade because they offer yield and appreciation potential, while low-yielding bonds have barely matched inflation.
We favored stocks at the start of 2026 in our annual income outlook for the year. That was a good call given that the sectors we liked most -- broad dividend exchange-traded funds, energy pipelines and real estate investment trusts -- generated double-digit returns and managed to top the technology-heavy S&P 500 index.
Looking ahead to the second half of the year, stocks still look best. While the S&P 500 yields just 1%, there are plenty of pockets of the stock market where investors can snag 3%-plus dividend yields, including utilities, REITs, pipelines, and one of the most hated sectors, cable and telecom.
A good case, however, also can be made for bonds after a mediocre first half during which key bond indexes returned zero to 3%.
"Yields are very attractive," says Russ Brownback, BlackRock's deputy chief investment officer for global fixed income and co-manager of the BlackRock Strategic Income Opportunities fund. He says yields look appealing relative to inflation, now running at more than 3% and possibly headed below 3% by the end of this year.
Treasuries now yield 4% to almost 5%; investment-grade corporate bonds, 5% to 6%; mortgage securities, 5.5%; junk bonds, 7% or more; preferred stock, 6%; and municipal bonds, 2% to 4%.
A negative for bonds is that yield premiums relative to U.S. Treasury debt are historically narrow in sectors like corporates, mortgage securities and municipals, reflecting strong investor demand. Offsetting that are relatively high Treasury yields and the high credit quality of the corporate and municipal markets.
"Spreads are tight but all-in yields look good," says Rob Waldner, head of macro research for fixed-income at Invesco. After the recent meeting of Fed policymakers that ended on a hawkish note, there was speculation about potential increases in short-term rates this year, but those concerns have eased in the past week.
Waldner sees little need for any rate boost because he sees inflation peaking and heading toward the Fed's 2% target by the middle of 2027.
Here's an updated look at 11 sectors of the stock and bond markets.
There's a case for higher-dividend stocks, even after a strong showing for many dividend-rich sectors in the first half, including energy, banks and utilities.
The broad Vanguard High Dividend Yield ETF has returned 11% this year and the Schwab U.S. Dividend Equity ETF is up 18% after lagging behind the market with a 4% return in 2025.
The rally has meant less yield. The Vanguard fund only yields 2.3% and is weighted by large large-cap stocks like Broadcom, JPMorgan Chase and Exxon Mobil. The Schwab fund has been driven this year by stocks like Texas Instruments, Qualcomm and UnitedHealth Group.
One laggard worth considering is the ProShares S&P 500 Dividend Aristocrats, which has returned 7% so far this year. The ETF, now yielding 2.3% holds S&P 500 members with at least 25 consecutive years of dividend increases. Some of its big investments are Nucor, IBM and Colgate-Palmolive.
So-called midstream companies, which transport oil products and natural gas, have been one of the best income areas so far this year as the Global X MLP & Infrastructure ETF has returned 24%.
The sector got a lift from ongoing buildout in natural-gas infrastructure to support both electric power for data centers and liquefied natural gas exports.
That large gain could mean more muted returns in the second half of 2026.
Ted Gardner, a senior portfolio manager at Westwood Holdings Group, which runs the Westwood Salient MLP & Energy Infrastructure fund, says industry growth prospects are favorable, which should lead to ample total returns .
One positive: Most industry revenue is based on long-term contracts, meaning pipeline operators aren't sensitive to changes in energy prices.
Many investors refer to the sector as MLPs because partnership structures used to dominate the industry. Most pipeline operators, however, now are corporations, including industry leaders Williams Cos. and Kinder Morgan, while Enterprise Products Partners and Energy Transfer have retained partnership structures. The MLPs have higher yields and some tax benefits, but many investors don't like to get K-1 tax forms, preferring 1099s.
Gardner favors Williams, the country's leading natural-gas pipeline company. It aims to generate 10% annualized growth in Ebitda through 2030, one of the better outlooks in the sector. He also likes DT Midstream, another gas-oriented company and Energy Transfer, which has one of highest yields among large-cap pipelines at 7%.
Heightened competition in broadband and the threat of SpaceX's Starlink satellite-based internet service has put a chill on the sector, especially cable leaders Comcast and Charter Communications.
Comcast is trading like it is in terminal decline. The stock is down 20% this year to around $23, yields 6%, trades for just six times earnings, and has a valuable parks and entertainment business that could be spun off to investors.
AT&T had been an investor favorite coming into 2026 because its fiber buildout was allowing it to take broadband market share from cable companies. But the stock is off almost 10% this year to $22, and trading near a 52-week low with a yield of 5%. Starlink has emerged as the threat and investors are worried.
Wolfe Research analyst Peter Supino referred to Starlink as a potential "comet" bearing down on U.S. broadband incumbents as it aims to significantly add capacity in the coming years.
But the sector appears to be discounting the worst, with cable and telecom stocks now offering some of the highest yields in the S&P 500.
Real estate investment trusts followed a flattish 2025 with a strong first half as the Vanguard Real Estate Index Fund ETF has returned 12% so far this year.
There has been a wide disparity within REIT sectors as data centers, storage and malls have returned over 15% while apartments and single-family homes are barely higher.
Evercore ISI analyst Steve Sakwa wrote recently that estimates for funds from operations -- a key REIT cash-flow measure -- are up just 1% so far this year, and that the stock gains are largely the result of higher earnings multiples.
That makes him more cautious for the second half, but he sees value in some areas, including single-family homeowners Invitation Homes and American Homes 4 Rent.
He also likes out-of-favor Sun Communities in manufactured housing and Americold Realty Trust in cold-storage.
Also worth a look are apartments like Equity Residential, which has a deal to merge with AvalonBay Communities, as well as Mid-America Apartment Communities and Camden Property Trust -- all yielding about 4%. Apartment fundamentals -- notably rents -- appear to be improving.
Portfolio managers at Janus Henderson like REITs pointing to improving property fundamentals, strong balance sheets and take-private activity. They note that REITs offer diversification in a tech-dominated stock market with REITs the least correlated with tech of any industry group.
Individual investors love muni bonds for the tax benefits and historically strong credit quality, but there may now be too much enthusiasm for the market. That could hold down returns in the second half of 2026.
Muni bonds with maturities of 10 years or less offer little appeal now due to historically low yield ratios of top-rated munis relative to Treasuries. Ten-year munis with a triple-A maturity were yielding less than 3% last week, against almost 4.5% for the 10-year Treasury. Consider waiting to buy intermediate munis until yields get more attractive.
Invesco's Waldner says defensive retail buyers are favoring short to intermediate maturity munis over long-term bonds. The result is that better values lie in long-term munis now yielding 4%, closer to Treasury rates.
Muni ETFs are increasingly popular, including the iShares National Muni Bond and Vanguard Tax-Exempt Bond Index Fund, both with around $45 billion in assets and expense ratios below 0.1%. The largest open-end fund is the $88 billion Vanguard Intermediate-Term Tax-Exempt. These three funds yield around 3%.
Long underappreciated by individuals despite fairly ample yields and strong credit quality, mortgage securities are one of the better sectors of the taxable bond market. The bulk of mortgage securities are issued by Fannie Mae and Freddie Mac, which are quasi-government entities whose bonds carry little credit risk.
BlackRock's Brownback likes the market, saying investors get higher yields than on investment-grade corporate debt with higher credit quality and without the heavier new bond supply affecting corporate and Treasury securities. New agency mortgage securities yield about 5.5%, a percentage point higher than the 10-year Treasury. The complex mortgage cash flows argue for funds over individual securities.
The $40 billion iShares MBS ETF is the largest exchange-traded fund and yields about 4% -- reflecting a high percentage of older low-yielding securities. Brownback also likes the nonagency MBS market, which includes the jumbo home loans too large for Fannie and Freddie to package into securities.
One way to play the nonagency market is through the DoubleLine Total Return Bond run by longtime mortgage maven Jeffrey Gundlach. It has almost half its portfolio in nonagency securities and yields nearly 6%.
These funds offer a go-anywhere approach and an alternative to bond index funds like the $139 billion iShares Core U.S. Aggregate Bond that has a nearly 50% allocation to U.S. Treasuries due to the federal government's huge financing needs.
The $48 billion BlackRock Strategic Income Opportunities Portfolio Fund has sizable allocations to mortgage securities -- agency and nonagency -- and non-U.S. debt. It carries more risk than some bond benchmarks, but has a good record. Other options include the Invesco Total Return Bond ETF.
The Matisse Discounted Bond CEF Strategy is a distinctive fund focused on buying cheaply valued closed-end bond funds that trade at a discount to their net asset value. Muni funds made up a third of its assets as of May 31, but that percentage can vary based on opportunities elsewhere in the closed-end market. The small fund with about $50 million in assets ranks highly in its Morningstar category and yields 7%.
The combination of ample yields and tax benefits has made preferred issues popular with individuals.
Big banks are the largest issuers and their credit quality continues to improve, highlighted by the recent Fed stress test results. That enhances the stability of their dividends. Preferred is a senior form of equity, and dividends usually are taxed like those on common stocks, at a top federal rate of 20%.
Many investors hold preferreds directly, since preferreds with $25-face values generally trade like common stocks on the New York Stock Exchange. Bank preferreds from JPMorgan Chase, Wells Fargo and Bank of America yield in the 6% to 6.5% range now.
The iShares Preferred & Income Securities is the largest ETF at $13 billion and yields 5.5%. Another choice is the First Trust Institutional Preferred Securities & Income that focuses on non-exchange traded preferreds with $1,000 face values that often yield more than the $25-par issues held in the iShares fund. The First Trust fund yields about 6%.
Most bond pros would rather own anything else other than boring Treasuries, but there is a case for the sector.
Yields are in the 4%-5% range and interest on Treasuries benefits from an exemption from state and local taxes -- a plus versus fully taxable corporate debt for residents of high-tax states.
With yield premiums narrow in the corporate market, the opportunity cost of being in Treasuries is reduced. For equity investors, Treasuries can balance a portfolio by offering put-like protection. If the economy weakens, resulting in lower earnings and stock prices, Treasury yields likely would fall, lifting prices and offsetting equity losses.
The main negative is the federal government's annual deficit of close to $2 trillion that results in huge bond issuance -- adding to some $30 trillion of outstanding debt. Little fiscal restraint is in sight. That threatens to lift yields.
Investors can buy Treasuries directly from the government through the Treasury.gov website at regular auctions without paying a fee or through banks and brokers. Treasuries trade in an over-the-counter market, which is harder to access and is more opaque than exchange-traded securities.
For this reason, Treasury ETFs are a good choice. They offer low fees, monthly dividends and exchange liquidity.
Buyers can target any maturity sector, ranging from short-term Treasury bills to 30-year bonds and ever more volatile long-term zero-coupon debt.
Big ETFs include the iShares 1-3 Year Treasury Bond ETF and iShares 20+year Treasury Bond and Pimco 25+ Year Zero Coupon U.S. Treasury Index. Another option are Treasury inflation-protected securities, or TIPS.
TIPS are a rare asset class that directly benefits from inflation and the "real," or inflation-adjusted yields remain attractive, particularly for long-term bonds. The biggest ETF is the iShares TIPS Bond while the Pimco 15+ Year U.S. Tips Index offers exposure to the long-term TIPS sector.
Private credit is the new kid in the high-yield sector and its boosters had been highlighting the better performance relative to plain corporate junk bonds in recent years.
That has changed in 2026. The $1.7 trillion private credit market -- loans to highly leveraged private companies -- is facing its toughest test ever. The market is contending with rising defaults, outflows from semiliquid, retail funds like Blackstone Private Credit fund, and double-digit drops in prices on public funds structured as business development companies such as Ares Capital and Blue Owl Capital.
The junk market, by contrast, is having a decent year with returns of about 2%. Brownback and Invesco's Waldner like the sector. They point to roughly 7% yields and rising credit quality with half the $1.7 trillion market consisting of higher-quality double-B-rated bonds -- which are a notch below investment grade. That's a record percentage. Junk ETFs include the $15 billion iShares iBoxx $ High Yield Corporate Bond, yielding about 6%.
For those who want to play private credit, the best bet are public business development companies, or BDCs, now trading at an average discount to portfolio values of more than 20%. That builds in a margin of safety for investors and boosts yields. The VanEck BDC Income ETF offers exposure to the largest BDCs, trades near a 52-week low at around $12 after dropping 15% this year, and yields 14%.
The often-overlooked convertible market has been one of the best U.S. asset classes as the ICE BofA US Convertibles Index has returned 20%.
It has been an artificial-intelligence story, says Michael Youngworth, the director of convertibles research at BofA Securities. AI-related companies like Western Digital, a maker of memory chips, make up about a third the market, he says. A Western Digital convertible alone now accounts for over 5% of the market.
The AI exposure does make the convertible market vulnerable to any setbacks in the memory sector and other AI-related businesses.
The two largest ETFs are the iShares Convertible Bond ETF and State SPDR Bloomberg Convertible Securities ETF . There are many convertible mutual funds including those run by Calamos Investments.
There also has been an upswing in mandatory convertible preferred stock issuance this year including a big twin offering recently from Alphabet traded on Nasdaq under tickers GOOGM and GOOGN.
The Alphabet preferred yields more than 6%, versus 0.2% for the common stock, but the preferred lacks the security of traditional convertibles since it will be converted into Alphabet common in three years. This preferred is more like yield-enhanced Alphabet common stock.
Write to Andrew Bary at andrew.bary@barrons.com
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(END) Dow Jones Newswires
June 26, 2026 13:08 ET (17:08 GMT)
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